Virginia residents seeking relief under the nation’s bankruptcy laws generally file Chapter 13 rather than Chapter 7 petitions for one of two reasons. They could file a Chapter 13 bankruptcy because they have assets, such as a home, that they wish to protect, or they may be unable to pursue Chapter 7 bankruptcy because their income prevents them from passing the Chapter 7 means test. Individuals who earn more than the median income in their state are generally unable to pursue a Chapter 7 bankruptcy.
When a person who is struggling with overwhelming debt files a Chapter 13 bankruptcy, a bankruptcy trustee assesses his or her income and debts to determine an appropriate payment plan. The individual then makes monthly payments for three to five years. These payments are distributed to the person’s creditors in a manner approved by the bankruptcy trustee. When all of the payments have been made, any remaining debts are discharged.
Certain debts, such as student loans, delinquent child support or alimony and some unpaid taxes, cannot be discharged by bankruptcy and are paid first by a Chapter 13 payment plan. Once these debts have been satisfied, secured debts such as mortgages or automobile loans are paid before unsecured debts like credit card balances and personal loans. When bankruptcy trustees calculate Chapter 13 payments, they leave debtors with just enough income to cover their basic living expenses. This means that any change in circumstances could make the payments unmanageable.
Attorneys with experience in this area could help those seeking relief from overwhelming debt by explaining the differences between Chapter 7 and Chapter 13 bankruptcies and clearing up the many myths and misunderstandings surrounding debt relief. Lawyers could also petition the bankruptcy court to revise Chapter 13 payment plans when debtors have suffered a financial setback of some kind and are no longer able to afford their monthly payments.